On June 29th, the latest monthly survey jointly released by Citigroup and YouGov revealed a notable decline in UK household inflation expectations for June, as oil prices retreated. The one-year-ahead inflation expectation dropped to 3.8% this month from 4.7% in May, reverting to the level seen in January before the outbreak of the Iran conflict. Long-term inflation expectations also fell by 0.1 percentage points to 3.9%, aligning with the six-month average prior to the conflict. This data provides fresh evidence for the Bank of England that the risk of inflation expectations becoming unanchored is receding, further reducing market bets on a rate hike from the UK central bank within the year. The sudden drop in inflation expectations is most directly driven by the fall in energy prices. International oil prices have retreated significantly since the US-Iran ceasefire agreement allowed vessels to begin transiting the crucial Strait of Hormuz. Buoyed by the ceasefire news, international oil prices have fallen below $80 per barrel for the first time in three months, a sharp decline from the previous high of around $108. Given the UK's high dependence on energy imports, the drop in oil prices directly alleviates imported inflation pressures. Bank of England Governor Andrew Bailey explicitly stated in the June 18th policy announcement that the recent decline in oil prices is "encouraging."
Furthermore, the latest monthly survey from the European Central Bank (ECB) showed that the median expectation for inflation one year ahead fell from 4.0% in April to 3.5% in June, a larger drop than market anticipated. The survey window was from May 7th to June 1st, meaning it did not incorporate the impact of the US-Iran peace deal and the subsequent fall in oil prices to pre-conflict levels, suggesting actual short-term expectations could be even lower. However, medium-term inflation expectations remain elevated. Coupled with an upward revision to the final May core inflation figure compared to the preliminary reading, this indicates price pressures are spreading from the energy sector to the broader economy. This combination of results has intensified the ECB's internal policy divergence: the retreat in short-term data might ease the urgency for aggressive rate hikes, but medium-term stickiness and core inflation resilience support hawkish officials' stance for further tightening. Markets are currently reassessing the rate hike path, with expectations in flux. The tension between improved short-term expectations and underlying medium-term structural pressures suggests a policy pivot requires more evidence, and the ECB will likely maintain a cautious stance at least in the near term.
Key data to watch today includes the Eurozone's seasonally adjusted M3 money supply year-on-year for May, the Eurozone Economic Sentiment Indicator for June, and the final Eurozone Consumer Confidence Index for June.
US Dollar Index
The US Dollar Index consolidated with slight losses on Friday, currently trading around 101.30. In addition to ongoing profit-taking pressure, weaker-than-expected US economic data released during the session also weighed on the currency. A cooling of expectations for further Federal Reserve interest rate hikes provided additional downward pressure. Resistance is seen near 101.80 today, with support around 100.80.
Euro / US Dollar
The Euro edged higher on Friday, currently trading around 1.1390. Support stemmed from continued short-covering, while a softer US Dollar Index—pressured by profit-taking and diminished Fed rate hike expectations—also contributed to the Euro's rebound. However, the rally was capped by similarly cooling expectations for ECB rate hikes. Resistance is seen near 1.1500 today, with support around 1.1300.
British Pound / US Dollar
The British Pound consolidated with modest gains on Friday, currently trading around 1.3200. Support came from continued short-covering and a weaker US Dollar, which was pressured by soft US economic data and receding Fed hike expectations. A slight easing of UK political uncertainty also provided some support. Resistance is seen near 1.3300 today, with support around 1.3100.
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